Another State Going After Title Insurance Fraud

Well, it looks like the state of Missouri has jumped into the ring to fight title insurance fraud. The Missouri Department of Insurance, Financial Institutions & Professional Registration is pushing a bill (SB66) that would ban comingling of escrow accounts with other accounts, and requires title insurance underwriters to supervise and audit the agents who deal with consumers. It will also prohibit for the first time receiving or paying kickbacks for referring business to title agents and require agents to take continuing classes in the new regulations to keep their state licenses. The bill has been passed and it is up to the governor to sign it. This bill is a result of consumers losing their money and property to title companies who have used the consumers money to prop up their business or just outright stole it. Many of the victims have used title companies based on recommendations from their mortgage broker or realtor. Not all of the cases involve illegal kick backs but there are too many that do.

The reinforces my insistence that consumers learn more about title insurance and shop around for a provider. Most realtors and mortgage brokers care about their clients and are only trying to help them but in many cases they are unaware of the shady tactics employed by the title insurance company they recommend. In the end it is up to the consumer to choose where they place their trust and they need to take the time to ensure they are using a trust worthy and reputable title company.

For more information on the story visit STLtoday.com and read the actual bill at ALTA.org.

10 Tips for a Smooth Closing

1. Ask for a Good Faith Estimate of all closing costs and fees.
2. Understand the different types of fees and which ones you can control.
3. Try to schedule a pre-closing review for all documents and fees prior to closing.
4. Confirm whether you are expected to bring funds to closing and if certified funds are required by law.
5. Try to close between the 15th and 20th of the month. This will help minimize pre-paid interest.
6. Schedule your closing at a time that is convenient for you to ensure that you are not rushed.
7. When refinancing, be sure to review your payoff letter for any mortgages for the last payment date and any escrows that the lender is holding for you.
8. Confirm with the settlement or closing agent when and how your loan will fund.
9. When refinancing, never try to avoid your last mortgage payment by waiting until the last minute to pay. This can cause late payment penalties and even a negative rating on your credit report.
10. Shop around for title insurance. Get quotes from multiple title companies to find the best price and service.
    

Housing Market Slowdown Uncovers Increase in Mortgage Fraud

According to a recent article on the Inman News site 2006 showed a sharp increase in loans involving suspected mortgage fraud. According to the Mortgage Bankers Association there was an increase in mortgage fraud of 30% in 2006. According to the article, which can be seen on the ALTA site (I would prefer to post the original article on Inman but it requires a subscription), there were even greater increases in mortgage fraud in a number of states with high home prices.

"States with the fastest growth in mortgage fraud reports during the first quarter of 2006 were New Jersey (up 250 percent from the same period in 2005), California (214 percent), Arizona (213 percent) and New York (187 percent)."

The Mortgage Asset Research Institute (MARI) asserts that the high number of mortgage fraud discoveries is due to increased detection of fraud in 2006 and because the downturn in the housing market revealed fraud cases that were hidden by strong price appreciation. Now that that appreciation has slowed or even reversed there are more delinquencies and defaults because borrowers are unable to make payments or refinance because their home is now worth less than when they got their original loan. To me that explains why the fastest growing mortgage fraud cases are showing up in states that experienced dynamic home cost increases that are now reversing.

Most of the fraud cases are a result of borrowers misrepresenting their income, employment history, etc. In my opinion both lenders and borrowers played a part in this problem. The fact is that lenders were loose with their lending requirements in the booming market because homes were appreciating so quickly that borrowers could refinance or get out of their mortgage at a profit by selling. This meant that even if they provided fraudulent information it would not be discovered because the lender continued to get their money. It was not until the market started going south that borrowers were not able to pay their mortgages and lenders began looking into the problems more closely.

Of course borrowers are responsible too because they were providing false information to brokers, which ended up biting them back when they were unable to pay their mortgage payments. Too many people bit off more than they could chew because they falsely believed that the market would continue to go up and they could always refinance or sell at a profit. When the prices dropped this house of cards fell apart and they were upside down on their mortgages.

I believe that this report should represent an opportunity for lenders and borrowers to be more realistic in their expectations. Lenders have already started to increase lending standards. They are now being more selective in who they loan money to and are doing their due diligence on prospective borrowers. It is imperative that this continues so that lenders are protected and borrowers are not getting loans that they can not afford. Borrowers need to do their part too. They need to be more realistic in what they can afford and provide honest information on their loan application. In the end their dishonesty will cost them more than it will cost the average lender.

All financial markets experience ups and downs and the real estate market is no different. Too many people held the false belief that the real estate market would continue to rise at an astronomical rate. When the market corrected itself too many were left out in the cold (literally) and they are now paying the price. It is time for everyone involved to take a close look at the situation and change their behavior to avoid the problems we are seeing now.

5 Ways to Save on Closing Costs

1) Educate Yourself: Knowledge is power. If you go into a real estate transaction armed with the proper knowledge you will know what fees are legitimate and what fees are just tacked on to pad the pockets of the Title Company or closing agent. Some junk fees include document prep fee, processing fee, fax fee, etc. Research closing costs online and learn what the standard fees are and be on the look out for lenders or title agents trying to tack on extra fees. Being armed with the proper information can help you save a considerable amount of out of pocket expense.

2) Shop Around: The Internet has made it easy to comparison shop for just about everything and most people take advantage of it. Title Insurance and closing services are no different. You have the right to shop around to find the best price and service. Many people think that they have to use the title company recommended by their real estate agent or mortgage broker. Many agents and brokers imply that their clients have to use the company they recommend because they are being compensated for the referral. Get a Good Faith Estimate from the company your broker or agent refers and go out and get a few more from other title companies. Ask questions and try to get as much information as you can. Choose the title company that offers the best price AND with whom you are comfortable.

3) Avoid No Closing Cost Schemes: Mortgages offering no closing costs seem like a great way to save money on the surface. When you look a little deeper you may find that these programs will end up costing you much more in the long run. Most of these No Closing Cost loans simply tack on points to your interest rate. This means that you end up paying a larger monthly payment on your mortgage. Depending on how long you stay in the mortgage this higher rate can cost you thousands more than traditional up front closing costs. If you plan on holding the mortgage for more than a couple of years you will end up paying more in the end. One way that lenders can offer No Closing Cost loans is through a YSP (Yield Spread Premium), which is essentially a fee that brokers are paid for bringing in a mortgage at higher interest rate. Basically the broker gets a rebate from the lender for charging a higher interest rate on a loan. This is just one version of the No Closing Cost loan and there are many more that look great at first blush but tend to be much less attractive when looked at much more closely.

4) Negotiate Fees: Many fees associated with closing costs are regulated by the state. Items such as the title insurance premium are going to be the same no matter what because the state sets the rate. There are many associated fees that are not as closely regulated and you will see varying prices from each company. This is where you can negotiate. Some title companies will charge exactly what they are charged for municipal searches, recording fees, etc. This is where comparison shopping can help. Get a detailed breakdown of all of the fees charged and negotiate with the title company you choose to get the lowest fees you can for these services. If a company refuses to give you a detailed break down or refuses to negotiate with you drop them from your list and find a different company. There are plenty of title companies out there who are willing to work with you on your terms.

5) Negotiate With Seller: It may be a good idea to ask the seller to pay for part or all of the closing costs. Of course, this option depends on the motivation of the seller and the state of the housing market. If you are in a hot sellers market and the seller has a number of potential buyers they will probably not agree to help with closing costs. If you are in a buyers market or working with a seller who needs to get the home sold ASAP they are going to more willing to help with closing costs so they can get the deal done. You will need to work this out with the lender as well. Talk to your real estate agent and ask whether it is worth a shot. A good agent will negotiate this option for you. It never hurts to ask and with the market slowing down in many areas there are more sellers who want to get out of their mortgage and therefore more willing to do whatever it takes including paying all or part of the closing costs.

Is RESPA Obsolete?

U.S. HUD Representative Mark D. Shroder examines the efficacy of the disclosure strategy of the Real Estate Settlement Procedures Act (RESPA) in a recent article. The PDF of the Article is available here. One of the biggest problems with RESPA is not necessarily the regulations themselves but the limited enforcement and insignificant penalties for offenders. The article used a small number of FHA loans so it is not really fully representative but IMO it offers some good insight on some of the problems with RESPA enforcement.
My opinion after reading the article is that RESPA may not be obsolete but the way it is enforced is. The government needs to implement a stronger enforcement strategy that actually seeks out offenders and has the ability to levy heavy fines or even jail time for offenders. Right now the fines have not been raised since 1974 and are like pocket change to the big title insurers. RESPA needs teeth and with the recent release of the GAO Report on Title Insurance it is the perfect time to revisit the issue.

Good article on Closing Costs on the Personal Finance Advice Blog

The Personal Finance Advice blog offers a good breakdown of typical closing costs in real estate transactions. This is an excellent resource that can be used in conjunction with the links I provided in my previous post about closing processes and fees. The Internet is providing an excellent opportunity for consumers to learn about real estate transactions and take control of the process. I will continue to provide information and resources that I feel is useful in empowering consumers in all aspects of the real estate and mortgage process.